Fitch confirms 'BBB(lka)' rating to Merchant Credit

MCSL's asset quality at the three-month level remained weak with non-performing loans (NPL)/Gross Loans at 20% at FYE06 (19% at FYE05). Provision coverage for all NPLs in arrears over 6 months improved to 54% at FYE06 from 32% at FYE05.

Fitch Ratings Lanka last week affirmed the National Long-term 'BBB(lka)' rating of Merchant Credit of Sri Lanka Ltd (MCSL).

“Fitch derives considerable comfort from the strength of its ultimate parent BOC (Bank of Ceylon) which effectively owns 88% of MCSL's equity and wields considerable influence at its Board level by way of common directors. However, MCSL's rating is constrained by its weak asset quality, low capitalisation, and resulting weak solvency,” a Fitch statement said.

MCSL's asset quality at the three-month level remained weak with non-performing loans (NPL)/Gross Loans at 20% at FYE06 (19% at FYE05). Provision coverage for all NPLs in arrears over 6 months improved to 54% at FYE06 from 32% at FYE05. However, the agency notes that NPLs at the three-month level and resulting solvency as measured by Net NPL/Equity (128% at FYE06, 122% at FYE05) is considerably weaker than its peers, and could present challenges if there should be any economic downturn.

Profitability, as measured by MCSL's return on assets declined to 1.7% in FY06 from 2.1% in FY05 due to the NPL drag. However, Fitch expects spreads as measured by net interest margin (7.7% for FY06), to tighten somewhat due to competitive pressure but remain healthy, the statement added.

“MCSL, like other finance companies, faces some interest rate exposure on account of a bulk of its time deposits (82% of its funding mix at FYE06) repricing annually while matching a lending portfolio with tenors up to 4 years. With an equity base of Rs 262 million at FYE06, MCSL meets the minimum capital requirement of Rs 200 million set by Central Bank of Sri Lanka. However, equity/assets ratio was fairly low at 10.0% at FYE06 which was below the sector average (15.6% at FYE06),” it said.